Europe debt woes cast shadow on Fed session

Debt woes in Europe cast shadow on Fed session

MARTIN CRUTSINGER, ASSOCIATED PRESS

Published 5:30 am, Monday, June 20, 2011

WASHINGTON — If the U.S. economic slowdown weren't enough to deal with, the Federal Reserve this week must consider a new threat: a resurgent European debt crisis that could imperil the global economy.

Financial markets have been gripped by fears that Greece will default. Other European nations with heavy debt burdens, such as Ireland, Portugal, Spain and perhaps Italy could be at risk, too.

When they meet today and Wednesday, Fed officials will likely discuss what they might do to help shield U.S. banks and a fragile U.S. economy if Europe's crisis worsened.

Some analysts suggest that a panic would cause the Fed to intervene as it did during the 2008 financial crisis, when it lent billions to banks.

"The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States," said Sung Won Sohn, a professor at California State University. "If it spreads to Spain and Italy, then the global economy could be facing huge problems."

Once its meeting ends Wednesday, the Fed will issue a statement that's likely to say it will leave a key interest rate at a record low near zero for "an extended period."

Many economists say the U.S. slowdown means the Fed won't start raising rates until the summer of 2012, about six months later than many thought when 2011 began.

Later in the afternoon, the Fed will update its economic forecasts. Then Chairman Ben Bernanke will hold a news conference, his second session under his new policy of hav ing regular news conferences for the first time in the Fed's history.

Former Fed Chairman Alan Greenspan said last week that the likelihood of a Greek default is so high "you almost have to say there's no way out."

Greenspan suggested that the crisis potentially could push the U.S. into a second recession.

Still, economists say they expect no major announcements from the Fed this week.

Since Fed policymakers last met in late April, the economy has weakened. The unemployment rate is 9.1 percent. Most economists have downgraded their forecasts for hiring and growth for the rest of the year.

One step the Fed had taken to try to stimulate the economy is set to end June 30: its $600 billion Treasury bond-buying program.

The bond purchases were intended to lower rates on loans, lift stock prices and encourage spending.

Critics have complained that the bond purchases raised the risk of runaway inflation while doing little to boost growth.